Articles - Money

100% TAX DEDUCTIBLE HEALTH SAVINGS ACCOUNT
A health savings account is a tax-exempt account which allows you to pay or be reimbursed for certain medical expenses.
by Cary Beck

Have you heard the expression, “you can’t have your cake and eat it too”? Well now with the new health savings account, you can. You could also add ice cream and put a cherry on top. That’s how sweet this new deal is that became effective January 1. Its part of the Medicare prescription benefit bill that Congress passed at the end of 2003, and anyone (not just the self-employed as was the case with the Medical Savings Account), can take advantage of this great new plan.
The HSA is the only tax-qualified product that allows the contributions to be 100% tax deductible, the growth to be tax deferred, and the withdrawals tax free for qualified medical and dental expenses (refer to IRS publication 502). Doctor’s fees, prescription and non-prescription medicines and long-term care insurance premiums are a few examples of qualified expenses. The money does not have to be spent down every year. Contribute to the limit every year, get a tax deduction regardless of your income level and let your account grow tax deferred so you can have tax free dollars to pay medical bills in your retirement years. At age 65, unused HSA money can be withdrawn for non-medical reasons without penalty. Before age 65 a 10% penalty applies. In either case, ordinary income will be charged for non-medical reasons, but that’s no different than a 401K or a traditional IRA.

WHAT IS A HEALTH SAVINGS ACCOUNT?
A health savings account is a tax-exempt account that you set up with a U.S. financial institution (such as a financial broker, bank, or an insurance company), which allows you to pay or be reimbursed for certain medical expenses. This account must be used in conjunction with a high deductible health plan which is discussed later.

WHY WERE HSA’S CREATED?
HSA’s were created in response to the rising cost of health care. The intent of Congress in passing the HSA legislation was to provide a financial incentive for employers of all sizes and individual consumers to have health insurance and put health care decisions back in the hands of the consumer. HSA’s are part of a movement towards consumer-driven healthcare.
HSA’s will allow employees to retain contributions made on their behalf if they change employment. Assets cannot be lost if not used, and they will be carried over from year to year with the opportunity to save unused funds such as an additional retirement account.

QUALIFYING FOR AN HSA
1 To qualify for a health savings account, you must have a high deductible health plan (HDHP). For tax year 2004, a high deductible health plan is defined as one having an annual deductible amount of $1,000 to $5,000 for an individual and an annual deductible amount of $2,000 to $10,000 for a family.
2 You have no other health insurance coverage except what is permitted, e.g., disability, long-term care etc. (refer to IRS publication 553, p. 8).
3 Medicare eligible individuals cannot contribute to an HSA.
4 You cannot be claimed as a dependent on someone else’s 2004 tax return.

AMOUNT OF CONTRIBUTION
The amount of contribution depends on the deductible of the HDHP and your age.
For 2004, the maximum individual contribution is no more than $2,600 ($3,100 if you are age 55 or older). For a family, it is no more than $5,100 ($5,600 if you are age 55 or older). Contributions in excess of the limits may be included in your gross income and subject to a 6% excise tax.
You can roll over amounts from MSAs into an HSA without annual contribution limits. Rollovers from IRAs are not allowed.

THE TREND
The rising cost of health care is forcing employers to shift more of the cost to the employees while at the same time offering fewer benefits. The self-employed, with private health care plans, are either paying more premium or raising their deductible. Until December 31, 2003, the self-employed were the only ones who could attach an MSA to their HDHP. As of January 1, anyone can attach an HSA to their high deductible health plan. The HSA is such a wonderful opportunity, that it almost feels like we are getting away with something we shouldn’t. We better take advantage of this gift before Congress wakes up and wants it back.